The multi-attribute utility model (MUM) provides a systematic technique for making complex decisions. One innovative way business valuation experts may use this framework is to break down goodwill in divorce cases. Here’s a look at how this approach can help courts better understand experts’ analyses and conclusions regarding goodwill allocations.
What is goodwill?
Goodwill in a business valuation context is a catchall phrase that refers to all intangible assets that aren’t valued separately. When settling a divorce that includes a private business interest, goodwill is often divided into two components: 1) enterprise (or business) goodwill and 2) personal (or professional) goodwill.
In many jurisdictions, personal goodwill is excluded from the marital estate if the divorce involves maintenance payments. However, ex-spouses rarely agree on how to allocate goodwill between the two components.
How MUM works
MUM identifies the factors (or attributes) that matter most and assigns relative importance (or weights) to each attribute. Essentially, it determines the optimal choice given the factors the decision-maker deems significant.
A MUM analysis involves six steps:
- Define the alternatives.
- Identify the attributes.
- Evaluate the existence of each attribute.
- Evaluate the importance of each attribute.
- Compute the multiplicative utility.
- Compare the utility of the alternatives.
Applying MUM to goodwill
How can MUM be used to allocate value between personal and enterprise goodwill? The existence of certain attributes that are associated with the business as a standalone entity indicates that it has enterprise goodwill. Examples include the business’s:
- Location,
- Brands and trademarks,
- Established workforce,
- Recurring revenue streams, and
- Existing systems and organization.
Conversely, other business attributes may be associated with personal goodwill, which is linked to the individual owner(s) and can’t be easily transferred to a hypothetical business buyer. Examples include the owner’s:
- Skills and work habits,
- Specialized training,
- Personal reputation,
- Age and health, and
- Relationships with customers.
Valuation experts assess whether each attribute exists at the subject company by conducting interviews, researching the company and its market, and performing site visits. These steps also help the expert assign appropriate weights to each attribute to reflect its relative importance.
To illustrate: Suppose a business valuator has developed a simplified MUM with 10 attributes for each type of goodwill. When applying this model, the expert assigns a score of one to each attribute with a “significant presence” and zero if the attribute is weak or has no presence.
In a divorce involving ABC Co., the valuator determines that 10 of the 20 attributes from the model have a significant presence. If six are indicative of personal goodwill and four are indicative of business goodwill, the expert might decide to allocate 60% of ABC’s total goodwill value to personal goodwill and 40% to enterprise goodwill.
Applying structured methods like MUM helps ensure that decisions are supported by logic and evidence. Such methods provide practical ways to analyze complex issues and arrive at fair, supportable conclusions.
For more information
The appropriate treatment of goodwill varies based on jurisdiction, state law, legal precedent and case facts. Contact us if you’re involved in a divorce case where goodwill is a key issue. We can help determine whether goodwill needs to be divided into personal and enterprise components and whether MUM can provide an objective framework for your situation.
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